One of the most important lessons I learnt as a trader is that “pigs get fat and hogs get slaughtered”. This phrase is meant to warn those who get too greedy at the wrong time…
I’ll show you in a few moments exactly who the hogs are that are about to get slaughtered by the stock market.
But first let’s remember where 2013 has taken us.
So far we have been right about the Santa Claus rally which we correctly predicted would take the Dow higher by at least 3% in December. We reached our target for the Dow of 16,568 on Tuesday, and we almost touched our 1850 target for the S&P on the same day.
Although the market made its move slightly earlier than our target date of 23rd December, we still did better than traders who wrongly forecasting a pre-Christmas “crash”.
As I said on December 5th, declines in the month of December are buying opportunities.
However, now is a time to be very cautious about piling into the stock market. And here’s why:
According to my colleague Jason Geppert’s report, mutual fund traders’ expectations of a continually rising market has gone parabolic! Take a look at this chart:
The blue line shows that mutual fund traders are continuing to pour money into stocks at an increasing rate.
You see, “Mom and Pop” investors who have been too scared of buying stocks this year are finally getting brave (or dumb) and getting their feet into the stock market. They’ve already missed the best part of the market action which started in 2009, and now they don’t want to miss out any longer.
Sadly, “mom and pop” and the mutual fund traders who are getting greedy are a bit too late. They are going to be the hogs that will get slaughtered.
If you look again at the above chart, you’ll notice that whenever the optimism of fund traders has become extreme, this has always been a warning signal.
Previous times when fund trader optimism reached extreme levels was in March 2012, September 2012 and May 2013. Each time afterwards the market had a correction between 6 to 12%.
When you have 75% of “dumb money” thinking the market is going to go higher, you know something is not right.
Once the Santa Claus rally which usually lasts until the 2nd or 3rd of January is over, I believe we shall see an intermediate top in the stock market.